With the down real estate market and many homeowners threatened with foreclosure, the short sale has become a fast-growing trend.
In short sales, the bank allows homeowners to sell their homes for less than what they owe on the mortgage. This affects the homeowners’ credit less than if the home went into foreclosure. In turn, the bank generally gets 30 percent more for the house sold in a short sale as opposed to a foreclosure.
It may sound like a win-win solution, but it is much more complex than that.
Lawrence Duthler and Thomas Cronkright II, practicing attorneys who also own Sun Title, have launched a new company, Sun Law, to work with homeowners, realtors and lenders to assist them with short sales.
Short sales have become popular relatively quickly and have caught some realtors and lenders off guard. Lenders have had to adjust their staff to handle an influx of short sale properties, and realtors have had to move beyond their comfort zone of simply marketing and selling homes. Because short sales have risen so quickly, the middle ground between sellers, lenders and realtors has become congested with “mortgage negotiators,” who attempt to balance the perspectives from all three parties to get a short sale done in a timely manner.
Duthler warned there have been problems with short sales.
“Before, you had middlemen trying to negotiate these short sales. In the next wave, you had third parties come in and try to assist realtors with negotiating the short sales: contacting the lender, trying to get the lender to take less,” he said. “The problem was these folks were not very effective. It was very challenging for them to get paid, because every dollar that came out of the closing was less money to the lender.”
Duthler said lenders were reluctant to pay the third-party negotiators, and as a result, fees were taken out of the realtor’s commission or the cost was passed along to the buyer.
In addition, even though the lender agrees to allow the homeowner to sell the home for less than the mortgage, the homeowner is not necessarily relieved of that debt — and some homeowners are caught unaware of this important fact.
“It’s more than getting the bank to accept less than what’s owed. It’s trying to get the release (for the homeowner) from those deficiencies. You’ve got the mortgage and you’ve got the promissory note. The bank might release the mortgage, but not release the debt,” said Duthler.
“This is what the lender is concerned about,” added Conkright. “They want the homeowner educated in this process. The marketing and the selling of the home is the easy part. It’s what is happening if there is a shortfall in what (the bank) is owed,” he said. “I think there are some surprises coming down the road if the bank chooses to collect on that shortfall.”
Cronkright said banks have six years to get a judgment on whether or not to collect, and 10 years to collect.
“There’s so much confusion out there. … Everybody believes that once (the bank) approves the short sale, that this is the end of the matter,” said Cronkright.
Duthler explained the difference between the mortgage and the promissory note: “There are two huge documents you sign when you buy a house. One is the promissory note that says, ‘I borrowed $100,000 and I promise to pay it back.’ The second is the mortgage that says, ‘If I don’t pay it back, I pledge my home as collateral for the debt,’” he said.
“In a lot of these short sales, the bank is willing to release the mortgage, because they know they won’t get as much money from a foreclosure. Step two is, are they releasing the note? And that’s what’s not happening. Folks that are getting experience with this, they see the release of mortgage and think they can walk away. If that note is not released, there’s a real problem.”
Employing a legal firm such as Sun Law helps clear up the confusion and makes the process more efficient for the lender and homeowner. Because of these efficiencies, the lender is usually willing to pay the legal fees. “No retainer, no upfront costs. Sun Law only gets paid if the short sale gets approved and closed, and it comes out of the proceeds that would have gone to the lender,” said Duthler.
Cronkright made clear the reasons lenders are willing to pay to have a law firm involved.
“First, you’re going to have education and formal representation on the part of the homeowner. In turn, you’re going to have realtors outside of what is a very legal area of real estate law and you’re not going to have these third-party negotiators … trying to assist the lenders, as well,” he said.
“What the lender is struggling with is getting the information and the documentation they need when they need to make the decision. They’re chasing down people and documents.”